Sunday, May 20, 2012

Quebec's
austerity measures which include the raising of tuition fees for its
post-secondary students have been headline news in Canada recently and now Quebec's September election is front page news. In
light of that, I thought that it was time to do a brief posting on Quebec's
financial situation.

Let’s
start by looking at Quebec’s debt.
Quebec is Canada's second-most indebted province after Ontario and has
the misfortune of having a bond credit rating that is in the lower middle of the
pack, well below Alberta, Saskatchewan and British Columbia, Manitoba and below
New Brunswick and Ontario at A+ (Standard and Poor's), the same
rating as Nova Scotia. This poor rating makes it more expensive for
Quebec to service its debt. Quebec's total debt in fiscal 2011 - 2012 is
estimated to be $170.9 billion; this compares to Ontario's
estimated debt of $237.6 billion. Quebec's debt nearly twice the size of
all other provinces combined (excluding Ontario). Here is a graph showing
how Quebec's net debt has risen since 1986 - 1987:

Quebec's
debt-to-GDP is estimated to be 51.2 percent in 2011 - 2012, the highest in
Canada by a very wide margin with Ontario coming in second place at 37.2
percent and Nova Scotia coming in third place at 35.2 percent.

In
the March 2012 budget, the Charest government noted that the deficit for fiscal
2011 - 2012 was lower than predicted in the fall, coming in at $3.3 billion or
1.0 percent of GDP compared to the estimated deficit of $3.8 billion. A
large part of this improvement is due to a decrease in spending on interest
owing on the debt of nearly $300 million, mainly on the back of lower interest
rates. That said, in fiscal 2011 - 2012, Quebec spent $7.452 billion on
debt interest charges which works out to 11. 4 percent of revenues and 12.1
percent of program spending. Projecting forward, even as the debt hits
$183.4 billion in fiscal 2013 -2014, Quebec does not anticipate debt interest
charges in excess of 12.2 percent of revenue. Best of luck!

As an aside, Quebec's
headline austerity measure, the increase in the Quebec Sales Tax from 8.5 percent to 9.5
percent on January 1st, 2012 had an impact on consumer spending in the province
as consumers hastened to make purchases before the tax increase. I can
only imagine how many provincial treasurers are watching this move with great
interest.

Here is a graph showing how and when Quebec plans
to return to budgetary surplus:

Here
is a graph showing how Quebec plans to cut the annual growth rate of spending
increases from an average of 5.7 percent annually from 2006 to 2010 to an
average of only 2.8 percent from 2010 to 2014:

I
find this interesting, particularly since Quebec's population, like that of the
rest of Canada, will be aging and availing themselves of more and more of the
province's health care over the coming years yet, Quebec plans to spend less.

Quebec's
objective is to reduce its very high debt-to-GDP ratio from a peak of 55.3
percent to 45 percent by 2026 as shown here:

My
suspicion is that this too will be a difficult target to meet, particularly if
interest rates on its existing debt rise to historical norms. As well,
should another deep recession become entrenched in the global economy, it will
be very difficult for a future Quebec government to avoid spending additional
funds to stimulate the economy just as they did during the Great Recession. As
well, Quebec has booked $825 million in "new measures" which will
consist of either revenue raising or expenditure restraint that will take place
from 2014 - 2015 onwards. Since these "measures" have not been
identified, they provide a downside risk that the plan to cut debt and deficit
will not be met.

Quebec's
economic growth is projected to be rather modest, particularly when compared to
the rest of Canada as shown here:

This
sub-par growth forecast is due in large part to softness in job creation and an
expected slowdown in the province's housing market. Sales of existing
homes and new home construction levels are both declining and this decline is
expected to continue through 2013. Interestingly enough, TD Economics
projects that Quebec's housing prices will correct in the range of 10 to 15
percent by the end of 2013. When all economic data is tallied, the government
assumes that GDP will grow by 1.5 percent in 2012 and 1.9 percent in 2013, slightly less optimistic than TD's forecast.

While Quebec's move toward fiscal balance are admirable,
there are many unknowns in the equation that may prevent fantasy from becoming
reality. Quebec has traditionally relied rather heavily on transfers from the federal government as shown here:

If
the Harper government follows through with its plans to wean Canada's have-not
provinces from the federal teat, Quebec may find it impossible to meet its
fiscal goals. As well, when interest rates return to normal levels, Quebec's expenditures on debt interest payments will become an ever-increasing portion of its overall spending. Since Quebec is already Canada's most highly taxed regime, if the province hopes to meet its targets, it has only one choice - cut spending now.

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About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.